FINRA Investigations 101: Investigation Process & Defense

FINRA investigation lawyer Rob Herskovits, a New York based securities lawyer with a practice focus on defending broker dealers and advisors targeted by FINRA, looks at the first phase of the investigation process: the 8210 request for information and documents.

Hi, this is Rob Herskovits from Herskovits PLLC. By now you have in your hands a letter from FINRA. You don’t know, necessarily, why you have received it or what they are looking for. But if you go through the letter, you’ll see that FINRA has sent it to you pursuant to Rule 8210.

We’ll get into what Rule 8210 is, because you probably have a lot of questions and a lot of fears as to why FINRA is even taking a look at you at this juncture. We’ll address those concerns and those fears, and map out a typical strategy that I may follow with an individual who has received an 8210 request for documents or information.

But, before going there, we should talk about how you, or people like you, even get on FINRA’s radar screen in the first instance.

So, FINRA receives regulatory tips of foreign investigation from a variety of sources. It could be by virtue of automated surveillance reports that FINRA itself, they’re proprietary, and that FINRA itself maintains. And, those surveillance reports will study market activity, and they’re akin to an exception reporting system at a brokerage firm. They have parameters, and unusual or suspicious trading could trigger those parameters and spit out a report that would instruct a FINRA examiner to look further at any particular trading.

A second source of information, from which FINRA gets tips, are cycle examinations. That could be an examination of the broker dealer or the branch office itself. Another source could be referrals from other regulators whether they be federal like the SEC or state securities regulators. Sometimes FINRA receives tips directly from the investing public or through its whistleblower office.

Importantly, though, FINRA receives a significant number of tips from Forms U4 and Forms U5. And as, undoubtedly, you’re familiar, there is a wealth of information that you are required to disclose on a Form U4.

It could be bankruptcy, it could be litigation, it could be arbitration, and it could be customer complaints. It could be judgments or liens. And, as we’ve seen, FINRA, a couple years back, did a massive sweep because they searched out for undisclosed judgments or liens and sent out hundreds, if not thousands, of letters to registered people saying, “Hey, why isn’t that judgment, or why isn’t that lien disclosed on your Form U4?”

Form U5 is a little bit different. It’s a registration termination notice. So, if you worked at a brokerage firm, and you moved on, and you’re no longer registered at the firm, the firm is required to submit a Form U5.

While we’re on the subject of a Form U5, because it is a traditional source of information to FINRA for purposes of initiating a regulatory review, let’s talk for just a moment, reasonable steps a person like yourself could take if you have, say, been fired by a brokerage firm. Firms typically have to submit a Form U5 within 30 days of the termination of registration.

Now, we can’t go back to the firm and say, “Look, we understand that he was fired, but why don’t you just mark down on a Form U5 that the termination was voluntary?” That would be entirely inappropriate, and no serious broker dealer would ever entertain a request like that. So, that’s one extreme.

However, firms are often willing to listen to reasonable proposals which will accurately describe the basis for the termination but may simply be different language than the language that the firm first anticipated using.

So, that’s important because it is, in fact, the language of the Form U5, the description for the termination, or the description of the internal review, which could trigger a further investigation by FINRA. So, people don’t often pursue that initial step but, to my mind, the sophisticated players in this space do, because they recognize that a Form U5 language is important and, to the extent that it could be appropriately shaped through counsel, it’s important to do so.

So, let’s just talk for a moment about what Rule 8210 is. It’s a very, very expansive rule. It gives FINRA the opportunity to demand virtually unlimited books and records from a broker dealer or from an associated person. And, it’s not even limited to traditional activity that a broker dealer or an associated person would engage in.

Rule 8210, if you were to look at the fine print, what they call the “supplementary material,” you would see that it even permits FINRA to make requests of outside business activities or private securities transactions. So, let’s just say you own a restaurant in addition to your professional activities as a financial advisor, or you own car washes or any other outside business activity one could think of, FINRA would be entitled to seek documents and information concerning the car wash or the restaurant or the real estate investment, etc.

They won’t often exercise their right to seek those documents unless they feel that there’s something there worth taking a look at. But, nevertheless, a lot of people give me a call saying, “Why are they sticking their nose there?” The short answer is, “Sometimes they’re sticking their nose there because they can.” So, it’s important to understand the breadth and reach of Rule 8210.

What’s also important for you to recognize is how we respond to their written request for information. It is a natural tendency for a smart professional in the securities industry, who may even have a sales background, to try and talk their way out of a FINRA investigation. That is a natural tendency that we would likely try to suppress. And, I’ll tell you why.

Oftentimes, when people say too much or voluntarily offer up information that wasn’t even requested in the first place by the investigatory agency, they have now offered up information unwittingly which could expand an investigation and otherwise move the investigation into areas that it wasn’t going to move into on its own.

So, the language that we choose in responding to an 8210 request is absolutely critical. Of course, there have been times when I’ve drafted 8210 requests, and I’ve put in a very, very lengthy, very detailed response. Because, in those situations, I was confident that if I gave a very fulsome response, even getting into areas that the examiner may not have specifically asked for, in the examples I’m thinking of, I was confident that if I did that, I’d be able to shut down the investigation right then and there.

And, I’ve generally been right in that approach, but I only use that approach if the facts call out for it. And, it certainly requires a very careful analysis.

So, one thing we need to consider is, once you have submitted documents and information to FINRA, what else does FINRA do? Well, FINRA, typically at that point in time, will seek documents and information from other sources, as well. It could be other individuals in the industry. It could be your former employer.

And, once FINRA has satisfied itself that it has collected a sufficient amount of documents and information from whatever sources that they desire, they may call you in for an on-the-record interview, which is also governed by Rule 8210. An on-the-record interview, or as we call it, “OTR”, is akin to a deposition in traditional court litigation. And, while it’s similar, it’s similar in the sense that it’s sworn testimony. You raise your right hand. There’s a court reporter present. Documents are marked as exhibits. A transcript is prepared.

It’s similar in that sense, but it’s very different from the perspective of what rights you have as a person who is submitting to the on-the-record interview as opposed to a person who is giving a deposition.

In a deposition, I would have the right to make a variety of objections which would be reserved for trial. Or, if there was a big problem, I could ask a judge to intervene. At FINRA, there is no judge to intervene. The FINRA examiners are the final arbiters as to whether a question, or a line of questioning, or an area of inquiry, is appropriate.

So, they have a very liberal interpretation of what they think is an appropriate line of questioning. And, therefore, there’s really no pushback that one can give. Typically, they’ll respect objections based on Attorney-Client privilege, but that’s about it.

So, given that, it is not a level playing field, at all. Given FINRA’s expansive powers to seek documents and information and not give you any notice that they are seeking documents or information from various sources, given that lots of times people feel that they are walking into an OTR one hand tied behind their back, without really a full understanding of what they’re even being investigated for, given all of that, the preparation is key.

We need to sit down, and we need to carefully review all of the documents and information that we’ve provided to FINRA. We need to reach out to others, including former employers who may have provided documents and information to FINRA, and do our best to analyze what are the outcomes of other cases that FINRA has looked at with analogous fact patterns.

Because if you read enough FINRA settlement agreements, something that they call “AWCs” or “Acceptance Waivers and Consent,” or if you read enough decisions coming out of FINRA’s Office of Hearing Officers, which is their own internal disciplinary hearing board, you will often be able to start to get a clear sense as to, specifically, what FINRA may be looking at and what type of exposure someone may have.

So, it’s important to cover all of that and, of course, the obvious, to review any pertinent regulatory notices. They used to be called “NESD Notice to Members.” Now, they’re called “FINRA Regulatory Notices”, that are on point. That, too, provides a wealth of information which would help shape preparation for testimony, provided that we could find regulatory notices that are on point.

So, in other audio files that I hope you’ll listen to, we’ll speak about what comes next, what happens after a FINRA on-the-record interview, because it’s an interesting part of the process that’s called the “Sufficiency of Evidence” review. And, then, what happens thereafter, getting into a Wells Call and a Wells Submission, and if the matter moves even further into a formal complaint filed by FINRA. But, let’s not get too far ahead of ourselves, and I appreciate you tuning in.

Rob Herskovits New York Securities Lawyer – FINRA Investigation Attorney CONTACT INFORMATION: Robert@herskovitslaw.com or 212.897.5410